Gross sees possible further devaluation
Bill Gross, who has made no secret of what he thinks about more quantitative easing from the Federal Reserve, says the U.S. dollar could be in for a mighty fall over the next few years if the central bank were to continue on that path.
The Fed is widely expected tomorrow to unveil details of a new round of quantitative easing, dubbed QE2, an attempt to drive down long-term interest rates by buying up Treasury paper given that short-term rates can’t go any lower.
Some have questioned whether QE2 can have a meaningful impact, and whether is “debasing” its currency with such a move. Generally, the U.S. dollar has been weak but investors have buoyed stocks, counting on a hefty measure of stimulus from the Fed when it ends its two-day meeting with an announcement tomorrow afternoon.
This comes at a crucial time for the U.S. recovery, which not only is faltering but is heading into a period of expected gridlock among U.S. politicians after today’s mid-term elections, Globe and Mail New York correspondent Joanna Slater reports.
“I think a 20-per-cent decline in the dollar is possible,” Mr. Gross, the chief of PIMCO, told the Reuters news agency yesterday.
Last week on PIMCO’s website, he likened QE2 to a Ponzi scheme, and warned of the consequences for bond investors.
“When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory - that is a debasement of the dollar in terms of the supply of dollars on a global basis,” Mr. Gross told Reuters.
“... QE2 not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices.”
This is a key week for major central banks, Globe and Mail Washington correspondent Kevin Carmichael writes today. Not only did the Reserve Bank of Australia and the Reserve Bank of India raise rates today, but the European Central Bank and the Bank of Japan are set for policy decisions as well later in the week.